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Financial Regulations and Their Scope in Corporate Governance

Financial regulations are a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non- government organization.

A stable and efficient financial system has a potentially powerful influence on a country’s economic development not the least because it may have an impact on the level of capital formation, efficiency in the allocation of capital between competing claims, and also tire confidence that end-users (consumers) have in the integrity of the financial system. The stability and efficiency of the system has both supply-side and demand-side effects on the economy. In turn, a well-structured regulatory regime contributes to the efficiency and stability of the financial system.

The overriding purpose of regulation should be to facilitate legitimate business activity while providing safeguards for the interests of stakeholders and ensuring fair competition in the market. ‘Safeguards for stakeholders’ include:

Deterring and restraining companies from pursuing illegal or excessively risky practice that  have the potential to have wider social or economic consequences and Intervening and responding appropriately and effectively where breaches are considered likely to occur or have already occurred’

The specific aims of financial regulators are usually

1. To enforce applicable laws
2. To prosecute cases of market misconduct such as insider trading
3. To license providers of financial services
4. To protect clients, and investigate complaints
5. To maintain confidence in the financial system
6. To maintain prudential regulation for the safety and soundness of financial institutions
7. To maintain stability and, integrity of the payments system
8. To perform prudential supervision of financial institutions
9. To propagate conduct of business regulation (i.e., rules about how firms conduct business with their customers)
10. To make safety net arrangements such as deposit insurance and the lender-of-last-resort role performed by the central bank
11. To do liquidity assistance for systemic stability, i.e., liquidity assistance for solvent institutions
12. To handle the insolvent institution.